We are on the fast track, headed straight toward a recession. When a recession is looming, and economic conditions are changing rapidly, there is never a more important time to stay on top of your investment portfolio.
Throughout 2022, we have watched the stock market make massive swings and dives. It seems like every other day there is more news about the market crashing once again. That is because, despite what financial advisors and companies want you to believe, the stock market is volatile and sensitive to both macro and microeconomic shifts.
Now is the perfect time to shift your attention away from the stock market and focus on an asset class known for its stability and reliance during economic downturns.
What is Multifamily?
It is a type of real estate investment that involves owning and managing multiple homes or apartments within one complex or title. Think of these properties as townhome developments, apartment buildings, duplexes, or mobile home parks.
Why does multifamily perform so well during recessions?
Housing will always be a necessity, and during times when there’s a housing shortage across most highly populated regions of the United States, the demand for housing will undoubtedly remain strong. Rental and vacancy rates are slow to respond to economic distress. Unlike corporations that must depend on consumers buying their products or services, multifamily properties operate as a business offering the essential need of housing.
What is more, rental rates tend to follow the same trend as inflation, and if you haven’t heard, inflation is out of control. So as interest rates climb and homebuying becomes increasingly unachievable for everyday Americans, tenant demand will continue and likely increase.
Selecting the right multifamily investment.
While multifamily properties can deliver excellent cash and appreciation returns, not every building has the same investment potential. Therefore, it is still essential that the property and market be carefully researched before purchase and that the asset is then managed to increase rent returns. When buying multifamily assets, we target high population and job-growth regions.
It is also important to consider active economic trends. For example, are crime levels decreasing or increasing? Unemployment may appear low now, but has it always been historically low, or is this a recent development?
Data trends and local economic conditions play a major role in the asset acquisition due diligence.
Multifamily Investment Classes
There are three main classes of multifamily assets:
Class A: These properties are new or recently updated properties near major metropolitan areas or employers. They generally have the highest level of demand.
Class B: Think of this class as the middle ground properties. They might have older finishes in need of renovation or are located a little further from the most desirable neighborhoods. Generally, demand for Class B apartments is still strong, and they are a worthwhile investment.
Class C: Class C apartments are almost always older buildings located on the outskirts of employment centers. They can have great cash returns and lower price tags but come with added risk during economic downturns. Because they sit in less desirable areas, their vacancy rates are often higher and, therefore, can see a drop in rents during a recession. However, Class C multifamily assets can be excellent value-add investments, which can increase returns exponentially.
What have we learned from previous recessions?
The Great Recession in 2007, which coincided with a near catastrophic housing crash, is still fresh in the minds of many investors. Yet, despite huge drops in single-family property values, multifamily investors were amongst the first to see their properties bounce back.
Throughout previous recessions, multifamily properties have proven to be more stable than other commercial real estate asset classes. Consider if a retail business goes out of business during a downturn and leaves a storefront vacant, it could be months or even years before a suitable tenant is secured. Multifamily buildings tend to have low vacancy rates, and easier to find replacement tenants.
Recession resistant investing.
Multifamily properties offer a more stable, recession-resistant investment class. But selecting the right assets for profitability means analyzing key metrics to ensure strong occupancy rates as the economy declines.
Crown Capital Management, LLC. closely monitors markets and targets assets in growing markets with strong tenant demand. With a recession looming, our priority is to select investments with high occupancy and to target stable returns for peace of mind. Contact Kevin Greer at Crown Capital Management LLC for more information on passive multifamily investing.
Kevin Greer
Managing Director
312-525-1131